Saturday, April 09, 2011

Tax the rich?

Many on the left claim that the our $1.5 trillion deficit can be solved by "taxing the rich." Is it possible? Megan McArdle posts the work of her reader Trimalchio on the amount of income that the "rich" have and how much tax revenue would be generated by increasing tax rates on it:

For anyone who wants to discuss the revenue side of the budget debate knowledgably, I highly recommend spending some time with the IRS's Statistics on Income. Table 1.1 under Individual Statistical Tables is a good place to start: http://www.irs.gov/pub/irs-soi...

You can see, for example, that total taxable income in 2008 was $5,488 billion. Taxable income over $100,000 was $1,582 billion, over $200,000 was $1,185 billion, over $500,000 was $820 billion, over $1 million was $616 billion, over $2 million was $460 billion, over $5 million was $302 billion, and over $10 million was $212 billion. Effective tax rates as a percentage of taxable income seem to top out around 27%.

You can estimate the effects of various proposals in the best case, which is that each percentage point increase in the marginal rate translates to an equal increase in the effective rate. Going back to 2000 ("Clinton era") marginal rates on income over $200,000, let's call it a 5 percentage point increase in the marginal rate, would therefore yield $59 billion on a static basis.

In other words, using his (unrealistic) "best case" and "static" assumptions, returning to Clinton era tax rates on the "rich" (incomes over $200k) would only raise $59 billion, a pittance compared to our $1.6 trillion deficit.

I didn't find Trimalchio source but, if you want to look at the numbers yourself, I did find similar information from irs.gov for 2005 here (PDF) in Figure B.